China’s handset-makers plan home-grown platforms

Analysis China’s mobile phone market is about to hit an epic milestone of one billion users, but experts are split over whether the country’s 4G plans will succeed, while opportunities for non-local tech companies could become increasingly limited in the region as homegrown mobile platform players emerge.

With official figures from the end of 2011 putting mobile user numbers at around 950 million it’s widely expected that the all-important one billion mark will be passed some time during the first quarter of 2012.

However, only a quarter of these are smartphone users, with just 13 per cent on 3G networks while the remaining number are on 2G and therefore mainly use their phones for voice calls and texting.

The latest update from the government – which in Communist China owns all three mobile operators – is that it will not dole out 4G licenses for another two or three years until the number of base stations in the country is doubled and the 220,000 or so existing 3G SCDMA stations are upgraded to TD-LTE.

On the plus side, this 4G standard being trialed in China will not be affected by the same problems as China Mobile’s unique 3G TD-SCDMA which Apple still doesn’t support on the iPhone.

While it does have a competitor in LTE FDD, which is favoured in the US, there aren’t likely to be any support problems with TD-LTE given that the standard is set to be deployed in several other regions of the world.

“In China, TD-LTE has formed a complete industrial chain which covers system device, baseband, RF chip, terminal product, test instrumentation, and right now is in the final stage of scale testing. However, the overall development process is a year behind FDD-LTE,” Frost & Sullivan analyst Daniel Huang told The Reg.

“FDD frequency resources are increasingly lacking which is making China's own TD-LTE technology more and more attractive, and some major carriers are starting to choose TD-LTE and confirm their commercial plans. China Mobile has started its Global TD-LTE Initiative with 60 global telecom carriers, 30 main manufactures and some important international communication institutions, which is an important step for TD-LTE in the international market.”

However, Huang added that if the high cost of installing superior quality 4G networks is passed onto customers, the country’s mobile carriers may find 4G fails commercially in the same way that 3G has.

Handsets the key

William Chou, Deloitte’s TMT lead for China, countered that users are likely to want to make the leap from 2G to 4G as long as the service quality is good – something that let 3G down – and the handset makers bring out more reasonably priced smartphones .

“I’m quite optimistic of 4G in China – it’s only a matter of time as people there always see Europeans enjoying fast mobile internet and they want it too,” he told The Reg.

“The iPhone is still very expensive by general household standards but there are a lot of local brands such as Lenovo, Xiaomi and ZTE developing cheaper smartphones, prompting people to give up their current [less advanced] mobiles.”

For Gartner analyst Sandy Shen, it will be China Mobile leading the way with 4G roll-outs. She predicted that in terms of installed base - rather than shipments - smartphone penetration would double to reach 20 per cent by 2015.

Shen argued that knowing what segment to target is key to the success or failure of handset makers in a market where around 80 per cent of sales are made independently of carrier-based contracts.

“It is a hugely competitive market so you really need to make your products stand out and target a segment where you can excel,” she told The Reg.

“Samsung and Apple are high end brands which position their devices as premium products so they can command premium prices while Huawei and ZTE are good at competing at the low end. There are many different segments to target but once you’ve decided then you need to put all your resources into things like marketing, branding and distribution.”

Not in my back yard

For those big name handset makers and platform providers rubbing their hands with glee at the prospect of an ever growing mobile user base of potential customers, however, Deloitte’s Chou had a word or two of warning.

He argued that, as in many other spheres of life, Chinese companies would eventually look to better and edge out their international rivals in the domestic market.

At the very low end of the smartphone market this will come in the form of “micro-innovation” in the shanzai industry, he said.

Now, shanzai are products deliberately designed to copycat more famous models at a fraction of the price, but Chou argued that shanzhai peddlers themselves will become increasingly innovative and mainstream in taking the best of well-known products like the iPhone and tailoring them to the domestic market.

Even established platform providers Apple and Google, which between them have most of the smartphone market, could see their mobile ecosystem empires challenged in time.

“No Chinese handset maker has a solid platform that can compete with Apple and Google yet but we are at a very early stage,” he said. “Vendors like Huawei and Lenovo are providing smartphones not because they want to earn a profit from the sales but because they eventually want to dominate the application market.”

Handset vendor Xiaomi already has its own OS while Lenovo is also working on a home grown platform, although the details of exactly how they plan to build their respective mobile ecosystems and eventually make money from different software and service offerings remain to be seen, Chou explained.

One way they could appeal to the domestic user, he suggested, was in offering pre-loaded services from home grown web companies which have the green light from government censors and are more popular Chinese equivalents of globally famous sites.